If you are close to retirement, there is one critical thing you need to do before you say “hasta la vista” to your employer and jump ship. It is called preparing a retirement budget. It’s something you need to do even if you’re retiring from your own business, let alone if you’re bailing out of a corporate job.
First, determine your retirement income
People today should plan on living to at least age 85. This means if you are 55, you will need to plan for a retirement that will last nearly 30 years. And if you are 65, you’re planning a retirement budget that will cover at least 25 years.
As a general rule, you will need 60% to 80% of your former earnings to maintain about the same standard of living. If you have been learning less than $50,000 a year, a target of 60% of that is probably sufficient. If you have been earning only $20,000 to $30,000 a year, you will likely need to take in 80% of that income just to live.
Government benefits
If you are retiring from the government or the military or are on disability, you may have a very nice pension. If not, you will at least receive some Social Security benefits. You have a couple of choices in terms of when you start to receive these benefits; the longer you wait the higher your benefits will be. In other words, if you don’t retire at 62 and wait until you are 65, you’ll receive more money.
Retirement investment and savings accounts
In addition to whatever benefits you are receiving from the federal government, you need to factor in any retirement investment accounts you might have such as IRAs and 401(k)s. Since these were most likely funded with pre-tax dollars, you need to keep in mind that when you reach age 70 1/2, you’ll be forced to begin withdrawing from them. On the other hand, if your retirement account was funded with post-tax dollars, such as is the case with a Roth IRA, you will not have to worry about this.
You should be able to also draw income from other sources such as an investment portfolio that, most typically, would include certificates of deposit, annuities, real estate income and stocks and bonds. Make sure that these investments are all pretty safe so they will generate steady, dependable income for you over time.
A low-stress job
Another good source of income is to get a low-stress, part-time job that will not only help you pass the time but can fill in any gaps in your retirement budget. You can begin a second career you are passionate about but never had the time to while you were earning a living. You can start freelancing online earning an income from the skills you’ve learned over the years.
Honesty is not just the best policy
You’ve heard that old saying, “honesty is the best policy.” But in this case it’s not only the best policy, it’s the only reasonable policy. If you are not honest in planning a retirement budget, you are doomed to end up either wishing you hadn’t retired or living a life far worse than you had anticipated.
Here are monthly costs that you may be able to reduce when you retire
Current Estimated Housing $1,700 $1,200 Life insurance $50 $40 Transportation $200 $100 Clothing $250 $100 Debt payments $400 $100 Education $350 0 Other $300 $200
And here our monthly cost that may actually increase when you retire
Current Estimated Medical $80 $200 Food $200 $400 Recreation $60 $150 Property insurance $20 $30
Years until you retire: 20
Inflation rate: 1.00%
Not adjusted Adjusted
for inflation for inflation
Current $3,610 $3,610
At retirement $2,520 $3,078
While these charts will give you some idea as to planning a retirement budget, you need to do a much more comprehensive budget-than the one shown above. You will need to make sure you costs such as auto maintenance, home maintenance, home repairs, clothing, auto insurance, gas and oil, gifts, dental, entertainment, emergency healthcare, eating out, any services you use (think lawn care or house cleaning) and every other household expense you can think of.
Where are you going to live when you retire?
You have to decide if you want to stay in your current home or if you want to find a state with no income tax to reduce your taxes. You may decide you want to live somewhere warmer so you may look to move to Florida, Texas, or Arizona.
You may want to decide to retire overseas and have your pension checks sent to you. This can provide you with a lower cost of living and make your retirement income stretch further. These are some of the considerations you have to consider when you prepare your retirement budget. Learn about the best places to retire.
Create a budget sheet
If you have a computer-based program such as Excel or OpenOffice.org you can use it to create your budget. If you do not have one of these programs, you can just use a clean sheet of paper and a ruler to create your budget sheet. Make sure you draw the lines in ink and then fill in the numbers in pencil so that you can change these as necessary. As shown above, you will need a column for each category of your expenditures and then two columns to the right-one for your estimated costs and another for your real costs.
Obviously you will not be able to fill in the real costs category until you have retired and learned what your real costs are. However, by creating this personal budget and by estimating what they will be after you retire, you’ll have a really good idea of how much income you need to live comfortably. And don’t forget to include a sort of a “slush fund” for those expenses that cannot be anticipated.
Sitting down, going through your expenses and calculating what you will spend on all those items certainly isn’t much fun. But it’s a lot less fun to retire and then wake up one day a year later only to discover that you don’t have enough income to cover your expenses and will have to either cut back on your spending dramatically or get another job.